DBRS Ratings GmbH (DBRS Morningstar) confirmed all ratings of Manulife Financial Corporation (Manulife or the Company) and its related entities, including Manulife’s Issuer Rating at A (high) and the Financial Strength Rating of The Manufacturers Life Insurance Company (MLI) at AA. The trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
The ratings and trends reflect the Company’s powerful franchise across Canada, the United States, and Asia, as well as the strong execution of a renewed strategic vision that has focused on derisking the legacy insurance portfolio and reducing the volatility of earnings generated by movements in equity markets and interest rates, while improving profitability and maintaining high regulatory capital ratios. Manulife’s ratings are also underpinned by a very strong risk management framework, excellent liquidity, good product diversification, conservative financial leverage, and a growing footprint in life insurance in Asia and wealth management globally. Most notably, the Company’s financial profile remained resilient through the peak of the Coronavirus Disease (COVID-19) pandemic.
Manulife’s ratings also consider its declining exposure to guaranteed products in Canada and the United States, as well as the complexities of operating a global insurance organization with large exposure to emerging markets in Asia. Manulife is well positioned to navigate a potential global economic slowdown given its solid geographic diversification, high quality investment portfolio, and leading franchise in key markets.
The ratings would be upgraded if Manulife Financial Corporation’s profitability remains consistent over time and further reduces its exposure to policy guarantees and long-term care products while maintaining its strong capital profile and conservative financial leverage.
Conversely, the ratings would be downgraded if there is persistently weaker and volatile profitability combined with a sustained deterioration in financial leverage and coverage ratios. The ratings would also be downgraded if the Company experiences an adverse capital event causing regulatory capital to decline substantially.
The Company’s broad and diverse franchise is supported by leading market shares in Canada, the United States, and Asia, where it provides a large variety of financial protection and savings products. The Company’s leading global franchise is supported by its robust distribution capabilities, a diversified product mix, and global brand recognition. The Company has a long tradition of operating internationally and is well positioned to capitalize on its strong presence in key Asian markets where the demand for insurance and wealth management solutions are growing faster than the global average. Manulife’s strategic vision and execution has already produced tangible results in terms of an improved risk profile and profitability.
Manulife’s earnings capacity reflects its solid market position. The Company has made strong progress on multiple fronts in terms of profitability, including improvements in expense efficiency and earnings growth across all lines, especially in Asia and Global Wealth and Asset Management. However, in DBRS Morningstar’s view, the implementation of IFRS 17 will likely increase earnings volatility in the short-term, which is expected for most Canadian life insurance companies.
Manulife has materially derisked its legacy portfolios of guaranteed products and long-term care policies, including the closing of a reinsurance transaction in February 2022 for over 75% of its legacy U.S. variable annuity block. The Company remains committed to continue its portfolio optimization plan and expects that the contribution to core earnings of the relatively riskier variable annuity and long-term care products will become less than 15% by 2025. Manulife has also largely decreased its earnings and capital sensitivity to equity markets and interest rates movements, which also provides support to the ratings. However, this requires a fairly large and complex hedging program that comes with additional challenges in terms of operational, counterparty, and model risk, as well as collateral spikes in certain market conditions. Positively, Manulife’s strong risk management infrastructure is viewed as sophisticated enough to mitigate these risks. Moreover, the coronavirus pandemic has proven Manulife’s ability to successfully navigate extreme market volatility and unprecedented business conditions.
DBRS Morningstar views Manulife’s liquidity position as very strong. The Company has a high proportion of government bonds in its investment portfolio, robust levels of cash, as well as excellent access to capital markets and committed lines of credit. The Company centrally manages its liquidity program and benefits from a large proportion of policies with claims levels that are well within its capabilities. This profile results in a claims distribution that should be largely predictable.
Manulife and its subsidiaries are very well capitalized. Total regulatory capital remains very strong, with the Company maintaining a Life Insurance Capital Adequacy Test (LICAT) Total Ratio for its major operating subsidiary, MLI, of 140% at March 31, 2022, which is above those of relevant peers in Canada and supportive of its current rating level. This LICAT Total Ratio translates to approximately $25 billion of regulatory capital above the supervisory target. The Company’s financial leverage ratio (including preferred shares and hybrids) as calculated by DBRS Morningstar was 26.4% at Q1 2022, slightly above Manulife’s long-term target of 25%. DBRS Morningstar also notes the improvement in Manulife’s fixed-charge coverage ratio, which stood at 10.8 times (three-year weighted average) at the end of 2021, reflecting stronger profitability after the initial adverse impact of the pandemic experienced in the first half of 2020. Although Manulife has high levels of regulatory capital, strong earnings in recent years, and ample access to diversified capital funding sources, DBRS Morningstar expects the Company to prudently manage their debt levels.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/.
The Grid Summary Grades for Manulife Financial Corporation are as follows: Franchise Strength – Very Strong/Strong; Risk Profile – Strong/Good; Earnings Ability – Strong/Good; Liquidity – Very Strong; Capitalization – Strong.
DBRS Morningstar notes that this Press Release was amended on 1 August 2022 to incorporate the job title of the Lead Analyst and the Chair.
All figures are in Canadian dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929/), as well as the DBRS Morningstar Criteria: Guarantees and Other Forms of Support, April 4, 2022; https://www.dbrsmorningstar.com/research/394683/).
The sources of information used for this rating include Morningstar Inc. and Company Documents; MFC 2021 Annual Report; MFC 2021 Environmental, Social and Governance Report; and MFC Q4 2021 and Q1 2022 Financial Results. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar's outlooks and ratings are under regular surveillance.
For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/400761.
This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Marcos Alvarez, Senior Vice President, Head of Insurance
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG
Initial Rating Date: June 12, 2003
Last Rating Date: September 22, 2021
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